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Is now the right time to buy the Greatland Gold (LSE: GGP) share price?

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Investing in gold is de rigueur! Even legendary investor Warren Buffett, famous for shunning the yellow metal, reveals his firm Berkshire Hathaway bought almost 21m shares in miner Barrick Gold earlier this year. He’s not alone. Shares in AIM-listed Greatland Gold (LSE: GGP) have rocketed 665% since the beginning of 2020.

Why are people investing in gold?

Gold is a hedge against uncertainty and inflation. Traditionally in volatile markets, investors pile in and buy the metal because it’s considered to maintain its store of value if the value of money drops. Currently, the economic uncertainty surrounding Covid-19 is stimulating gold demand.

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In addition, persistently low bond yields reinforce this response to uncertainty and inflation. With inflation rising, investors in gilts and other government bonds will likely lose money over the longer term. Hence, gold is a very attractive investment. And with $14t of global debt carrying a negative yield, many investors believe gold prices will continue to climb.

Moreover, if the gold price is high, so are the margins of mining stocks. The Greatland Gold share price explosion is a good example. And investing in gold miners offers advantages over buying the commodity directly.

The advantages of mining stocks

Mining stocks have three main advantages over buying physical gold.

Firstly, their strategies can be adapted to suit the changing environment. Gold production can be ramped up or down as required.

Secondly, profitable gold miners may pay a dividend, whereas gold transportation and storage cost money.

And thirdly, mining businesses produce financial statements, strategy reports, and other documentation that enable analysis and sound decision-making. In contrast, there is limited data about gold demand.

So, how does Greatland Gold stock weigh up as an investment case when measured against these advantages? 

How does the Greatland Gold share price stack up?

Firstly, Greatland Gold isn’t yet producing any gold. Consequently, its production processes can’t be altered accordingly, and its margins won’t grow with increasing gold prices. In addition, it doesn’t even seem to be setting itself up for gold production.

Recently, Greatland commenced systematic drill testing at its Scallywag prospect area in the Paterson region of Australia. And things are looking good.

But, according to its farm-in agreement, if it manages to develop its product, it could sell it to its partner Newcrest. Alternatively, it could process the mined deposits at Newcrest’s nearby Telfer mine. Outputs from this mine go to the Perth mint, or are shipped as cheaper copper-gold concentrates to East Asia. Whichever route it chooses, Greatland Gold producing gold directly is unlikely.

Secondly, Greatland Gold hasn’t yet turned a profit, meaning there is no dividend either. This is in stark contrast to Buffett’s choice of gold stock, Barrick Gold.

Greatland did, however, produce the right documentation for me to weigh all this up!

So, although there is a market demand for investing in gold, I don’t think Greatland Gold is in the best position to take advantage of it. But, it’s this same gold-optimism that appears to be driving the Greatland Gold share price explosion. Consequently, this is one mining stock I won’t be buying into.

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Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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